The central bank for the Czech Republic said the economy was evolving largely as it forecast in August, with inflation and economic growth only marginally weaker than expected.
Inflation is still expected to exceed the bank's 2.0 percent target for the rest of this year but gradually return to the target next year and remain close to it during 2020.
"Consistent with this outlook is a continued rise in interest rates towards their long-run neutral level," the CNB said, adding risks to its forecast were considered "balanced and insignificant."
Today's rate hike was expected after CNB Governor Jiri Rusnok earlier this month said the bank was likely to raise rates at today's board meeting and then one more time before the end of the year.
Consumer price inflation continues to exceed the CNB's target while core inflation, which excludes some volatile items, has been fluctuating around 2.0 percent in the last 5 months. The CNB has a one percentage point tolerance range above and below its 2.0 percent inflation target.
In August headline inflation rose to 2.5 percent from July's 2.3 percent while core inflation eased to 1.956 percent from 2.037 percent. In August the CNB forecast 2.6 percent headline inflation.
Low unemployment continues to push up wages and thus inflation, with wages in the second quarter rising by 2.0 percent from the first quarter for annual growth of 8.6 percent year-on-year, or 6.2 percent in real terms. In August the CNB forecast 8.7 percent wage growth.
The unemployment rate in August and July was steady at 3.1 percent, up from 2.9 percent in June but down from 4.0 percent in August last year.
The Czech economy continued to expand in the second quarter, with Gross Domestic Product up by 0.5 percent from the first quarter for annual growth of 2.3 percent as domestic demand propels growth followed by higher company investment and exports.
"Monthly indicators suggest continued solid economic growth in Q3," the CNB said, with consumer confidence still high and strong growth in income reflected in rising retail sales.
Against the U.S. dollar, the Czech koruna slipped in April but has remained largely steady since June although it has showed some appreciation in the last month. Today the koruna was trading at 21.8 to the dollar, down 2.4 percent this year.
Against the euro, the koruna has strengthened since early July but has barely budged in comparison to the start of the year. Today the koruna was trading at 25.59 to the euro, down from 25.54 at the beginning of the year.
During 5 years of extraordinary easy monetary policy, the CNB used the exchange rate of the koruna as an easing tool, intervening in currency markets to keep the koruna below 27 to the euro. This policy was scrapped in April 2017 as a first step toward tighter monetary policy.
The Czech National Bank released the following statement:
"At its meeting today, the Bank Board of the Czech National Bank increased the two-week repo rate (2W repo rate) by 25 basis points to 1.50%. At the same time, it increased the Lombard rate to 2.50% and the discount rate to 0.50%. Six members voted in favour of this decision and one member voted for leaving interest rates unchanged.
This decision is underpinned by the current macroeconomic forecast, presented in August, and by an assessment of information obtained since the current forecast was prepared. According to the current forecast, inflation will be above the Czech National Bank’s 2% target for the rest of this year. It will return to the target at the monetary policy horizon and remain close to the target during 2020. Consistent with this outlook is a continued rise in interest rates towards their long-run neutral level. At its meeting today, the Bank Board assessed the risks to the current inflation forecast at the monetary policy horizon as being balanced and insignificant.
The changes in the outlook for foreign variables are negligible. The forecast for consumer and producer prices this year is slightly lower, as is the outlook for foreign economic activity. In the longer term, expected foreign developments are virtually unchanged. The market outlook for the Brent crude oil price is almost unchanged as well. The euro-dollar exchange rate is marginally weaker over the entire forecast horizon than expected in the current forecast.
Following a temporary decline in July, domestic annual inflation rose again in August. Overall, it was only slightly below the forecast. Food price inflation was substantially lower than forecasted. Core inflation, by contrast, was higher than predicted. Fuel prices maintained their high growth rate and were only slightly below the forecast. In line with the forecast, growth in administered prices gradually accelerated further.
The growth of the Czech economy slowed in line with the forecast in Q2 and was only marginally lower than forecasted. As expected, fixed investment and household consumption were still the biggest contributors to GDP growth. The contribution of government consumption was also positive, though rather smaller than expected. Conversely, additions to inventories and net exports dampened GDP growth. Their deviations from the forecast largely offset each other.
Monthly indicators suggest continued solid economic growth in Q3. Sustained high consumer confidence and strong growth in household income continue to be reflected in rising retail sales. Industrial production and construction output have also recorded buoyant growth over the last two months.
The labour market is still creating strong inflationary pressures in line with the forecast. Employment continued to go up in Q2. As expected, unemployment dropped only slightly. Labour shortages coupled with strong labour demand led to a further increase in job vacancies. Wage growth remained stable in line with the forecast. While wage growth fell slightly short of the prediction in market sectors, it exceeded it in non-market sectors.
After the August forecast was drawn up, the koruna initially weakened slightly against the euro but later strengthened again in the course of September. Its average level in Q3 so far is only marginally stronger than forecasted. The previous depreciation of the koruna was due to a decrease in financial investors’ confidence in emerging markets and continued growth in US interest rates. By contrast, the increase in domestic interest rates is fostering appreciation of the koruna.
To sum up the important facts about recent developments in the Czech economy, the current macroeconomic forecast is materialising.
The Bank Board assessed the balance of risks to the current inflation forecast at the monetary policy horizon as being balanced and the individual risks as being insignificant. However, there is still general uncertainty stemming from the growth in protectionist measures in global trade and from Brexit-related events."
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